Credit and Your Personal Finances

When we speak of personal finance we often think of investments, 401Ks, savings, keeping to a budget, etc. But one area that is often neglected, yet is an extremely important part of our personal finances, is credit. If used effectively credit can expand our financial possibilities. Conversely, when exercised irresponsibly it can have a very damaging effect as well. Also, in many ways, credit is deeply intertwined with almost all the other elements that make up our personal financial portfolio. Credit is an extremely important part of our personal finances.

Personal finance is one of those terms that can cover many different financial activity of an individual as it relates to their money. Some of the obvious areas are of course income, savings, investment, insurance, and mortgages. But an often overlooked, but very important area of personal finance, is that of credit.

Credit is an essential instrument in our personal financial lives. The effective use of credit allows us to enjoy more of the positive things we desire in life and experience them sooner.

Take for example the home that is just perfect for you and your family on the market for $250,000. Without credit, you would need to come up with that whole amount upfront or wait until you had it saved. But with credit, in this case a mortgage, we can buy that now with only a percentage of the total cost down and the rest paid over time.

If fact, until the modern mortgage was established in 1934, only 40% of U.S. families owned homes. Without this form of credit we’d be living in a different world today. Not only does the use of credit to buy a home allow families to live in a place better aligned with their needs, but homeownership is a primary vehicle for wealth building. In fact, according the Federal Reserve’s Survey of Consumer Finances the primary residence is the largest financial asset for households in the United States and account for one quarter of all assets held.

Other aspects of our financial portfolio like insurance, which is needed to protect our assets, credit plays a central role. A low credit score here could mean paying much higher premium rates or not qualifying at all for the coverage.

Our salary from our employment is for most the main source of financial income. Many employers use credit score as a factor for making employment decisions. Without a solid credit score consumers may not qualify for the best, highest paying employment opportunities.

In many ways the options we have in life and even our quality of life depends on having a healthy personal financial portfolio. In future articles we’ll cover in more depth personal finance and the essential role good credit plays in it.